Kroger more upbeat after loyal customers boost 1Q

The Kroger Co. is forecasting a rosier year after its customer-loyalty programs helped boost net income in the first quarter.

The nation's largest traditional grocery store chain said Thursday that its targeted discounts and coupon mailings, which are based on purchase histories, are enticing more customers to return to its stores.

The aggressive courtship comes at a time when Kroger and other supermarkets and big-box retailers are struggling to manage their costs for products, which have ballooned as a result of higher fuel and commodity prices. Rather than taking the risk of scaring off customers by passing on those costs entirely, Kroger is focusing on cutting expenses and boosting traffic in its stores.

The strategy is paying off for Kroger, which operates Ralphs, Food 4 Less and Fred Meyer. Kroger said its "loyal households," which the company defines based on shopping patterns, grew in the quarter. These shoppers were buying fewer items per trip, but visiting more often and ultimately buying more than they did a year ago.

For the quarter, Kroger said revenue at stores open at least a year rose 4.2 percent, the 34th straight quarter of growth. The figure is a key performance metric because it strips out the effect of newly opened and closed stores.

The company stood by its forecast that the figure would grow 3 percent to 3.5 percent for the year.

Total revenue for the quarter was $29.06 billion, up from $27.46 billion but shy of Wall Street expectations of $29.16 billion.

Merchandise costs, which include advertising and transportation, rose to $23.1 billion, representing 79.4 percent of sales. That's up from 78.7 percent in the year ago-quarter.

Chief Financial Officer Rodney McMullen noted in a conference call with investors that the cost of the products the company puts on its shelves in the latest quarter rose 3.9 percent, a much slower rate than the company had expected. The figure rose 5.4 percent in the previous quarter.

Kroger has also been trying to offset expenses by keeping other costs in check. For instance, operating, general and administrative costs were $4.46 billion, or 15.4 percent of sales. That's an improvement from the same quarter last year, when those costs were 15.7 percent of sales.

"We have pushed hard to save money in places not important to customers, and to reinvest it in places that were important to them," CEO Dave Dillon said.

The company's income tax expense also eased to $232.2 million, from $252.1 million a year ago.

For the quarter, Kroger said it earned $439.4 million, or 78 cents per share. That compares with $432.3 million, or 70 cents a share, a year ago. The higher per-share figure in the latest quarter was the result of a reduced number of outstanding shares. Analysts on average expected a profit of 72 cents per share, according to FactSet.

Based on the strong first quarter, the company lifted its outlook for the year to $2.33 to $2.40 per share, up from the previous $2.28 to $2.38 per share. Analysts expected $2.32 per share.

The Cincinnati-based company also said it authorized a $1 billion share buyback. Shares of Kroger rose $1.29, or about 6.1 percent, to close at $22.58 Thursday.